How Robber Barons hijacked the “Victorian Internet”

Ars revisits those wild and crazy days when Jay Gould ruled the telegraph and …

As the Ars team convenes for two days of meetings in Chicago, we're reaching back into the past to bring you some of our favorite articles from years gone by. This feature originally ran in December 2009.

It was 1879, and investor Charles A. Sumner sat at his desk, frustration pouring onto the page through his ink pen. Sumner, business partner to the radical economist and journalist Henry George, was finishing the concluding passages of a book about what had happened to the telegraph, or the Victorian Internet, as one historian calls it.

"This glorious invention was vouchsafed to mankind," he wrote, "that we might salute and converse with one another respectively stationed at remote and isolated points for a nominal sum."

But instead, he continued, "A wicked monopoly has seized hold of this beneficent capacity and design, and made it tributary, by exorbitant tariffs, to a most miserly and despicable greed."

It's a largely forgotten story, but one that still has relevance today. If you follow debates about broadband policy, you know that there are two perspectives perennially at war with each other. One seeks some regulation of the dominant industries and service providers of our time. The other seeks carte blanche for the private sector to do as it sees fit. Nowhere does the latter camp press this case harder than when it comes to network neutrality on the Internet, and appeals to the Founding Fathers aren't unknown.

"Our founding fathers understood that it is government that takes away people's freedoms, not individuals or companies," wrote entrepreneur Scott Cleland in an opinion piece for National Public Radio not long ago. Cleland opposes the Federal Communications Commission's proposals to codify into rules its principles prohibiting ISPs from discriminating against certain applications.

"At the core, the FCC's proposed pre-emptive 'net neutrality' regulations to preserve an 'open Internet' are not at all about promoting freedom but exactly the opposite. Freedom is not a zero sum game, where taking it away from some gives more to others. Taking away freedoms of some takes away freedom from all."

Reading this argument, one wonders if there ever was an age when the hands-off school of regulation got exactly what it seems to want—a network environment largely untarnished by public oversight.

In fact, there was such a time.

Hayessociated Press

Rutherford Hayes

Library of Congress

Three years before Sumner wrote his lament, the country was wracked by the most convulsive presidential election since the outbreak of the Civil War: Democrat Samuel Tilden of New York versus Republican Rutherford B. Hayes of Ohio. The Republican party had split between loyalists to the administration of Ulysses S. Grant and those appalled by its corruption. In truth, the resurgent Democrats were no better when it came to civic virtue, but they lured some Republicans away with Tilden, who famously battled bribery and graft as governor of New York.

When, on that November night in 1876, the popular results indicated a narrow majority for the reform candidate, many assumed the first Democratic victory in two decades. But not so at one of the Associated Press's most prestigious affiliates, the ardently pro-Republican New York Times. When prominent Democrats nervously contacted the Times asking for an update on the results, its managing editor John Reid realized that the election was still in doubt. He contacted top Republican party officials and had them spread the word via telegram—the electoral college votes in Florida, Louisiana, and South Carolina were still in play.

It was easy for these men to access the telegraph system, because its main operator, Western Union, was also militantly pro-Republican. During the long controversy in Congress over who actually won the districts in the disputed election of 1876, Western Union secretly siphoned to AP's general agent Henry Nash Smith the telegraph correspondence of key Democrats during the struggle. Smith, in turn, relayed this intelligence to the Hayes camp with instructions on how to proceed. On top of that, AP constantly published propaganda supporting the Republican side of the story. Meanwhile, Western Union insisted that it kept "all messages whatsoever . . . strictly private and confidential."

Tilden supporters weren't fooled. By the end of the debacle—Hayes having won the White House—they called AP "Hayessociated Press."

The great giveaway

A Union Pacific advertisement

It was no secret why Western Union sided with Republicans. By the 1870s, the Party of Lincoln (Abe himself being a former railroad lawyer) had given away massive quantities of land for the construction of railroads and telegraphs: almost 130 million acres (about seven percent of the continental United States) was granted to eighty enterprises. Although the telegraph had been pioneered by Samuel Morse in the 1840s, the innovation didn't really take off, economically speaking, until it partnered with the railroads, at which point it became the Victorian era's version of our information superhighway.

The Pacific Railroad Act of 1862 sped up the construction of a coast-to-coast railroad system, and it further subsidized telegraph growth as well. But Congress provided very little regulation or oversight for the largesse.

The result was the infamous Credit Mobilier scandal of the 1870s, a scheme that bears some resemblance to the Enron debacle of 2001. Rather than license the construction of the Union Pacific railroad to an independent contractor, its Board of Directors farmed the work out to Credit Mobilier, a company that was, essentially, themselves. In turn, Credit billed the UP vastly more than the actual cost of the project. To keep Congress quiet about the affair, the firm offered stock in itself to Representatives and Senators of any political persuasion at bargain basement prices.

In this context, it should come as no surprise that the nation's telegraph system quickly fell into the hands of one of the most notorious schemers of the Gilded Age.

This is Scott Cleland Chairman of NetCompetition.org. You quoted me in your piece, and you used my viewpoint as a springboard to argue against the serious problems of monopolies. Thank you for accurately and substantially quoting my NPR op-ed on net neutrality where I argue that the greater free speech problem is the government threatening free speech rather than companies and individuals. Where I must take issue and must disagree is that you are apparently trying to imply that my strong free market views do not make room for strong support of strict and vigilant antitrust enforcement against monopolies exploiting their market power and/or acting anticompetitively -- because I have a strong and public record of support for strong antitrust enforcement. If you check out my history, I have opposed attempts by companies to be anti-competitive or achieve monopolies: WorldCom-Sprint, DirectTV-Echostar, XM-Sirius, & Google-DoubleClick. Moreover, I have testified before the Senate Judiciary Antitrust Subcommittee several times over the last several years, the most recent in opposing Google's acquisition of DoubleClick. Where I most disagree with your article is that broadband companies are monopolies when they clearly are not as the FCC/DOJ/FTC competition reviews have consistently found. The U.S. has more facilities-based broadband competition than any nation in the world. See: www.netcompetition.org. The supreme irony of the net neutrality debate is that the lead corporate funder and force behind the net neutrality movement is Google, which also happens to be the real leading monopoly threat today. Please go to WWW.googleopoly.net and read my Googleopoly I, II, III, and IV analyses to learn the facts and logic behind why Google is the single biggest threat to competition in the Internet/broadband sectors today.Thanks for the opportunity to put your article into fuller context. Respectfully, Scott Cleland

Interesting perspective, especially when I note that two out of three AP stories I read today seem very biased politically. I guess qualities like bias and greed are just human nature, aren't they? I would never argue with the proposition that corporations can be guilty of being human (because they are run entirely by human beings), provided I don't have to stipulate that the government is somehow above it all. Seems to me the government is run entirely by human beings, too. Some people seem to think, though, that the government is run by those Not of This Earth.

The government aided and incentivized the telegraph and railroad monopolies, and then calls came for regulation. IMO this has always been the strongest argument for Net Neutrality--the fact that most communications carriers, especially the cable companies, are not truly creatures of the free market. They are government-granted monopolies of one flavor or another, either through exclusivity contracts or through easement allotments. That these are sub-contractors for the government, more or less, is the best case for government regulation.

I do urge pro-Net Neutrality advocates to keep a wary eye on the power that government oversight of the Internet will bring. Governments love to meddle, and meddle it will.

The profundity of your article is refreshing. Your clear insight on the reality of Laissez-faire vs government regulation is timely. What seems interesting to me is how quickly people forget that in a power vacuum, the strong will do what they can and the weak (usually us the consumer) will suffer what they must. Government regulation is certainly no panacea, regulators are prone to influence, corruption, and negligence. However government is ostensibly in the service of the common good and ultimately beholden to the voter. Business is in the service of its own good and when a monopoly or oligarchy, beholden to none.

Originally posted by Scott Cleland: Where I most disagree with your article is that broadband companies are monopolies when they clearly are not as the FCC/DOJ/FTC competition reviews have consistently found. The U.S. has more facilities-based broadband competition than any nation in the world.

Hey Scott, if there's no broadband monopoly, why-come my only broadband options are TWC and AT&T or companies that have deals with TWC or AT&T? I live in a decent metro area, right outside the largest military installation in the country... Once I do get to the internet - with the permission of TWC or AT&T - I can use any search engine I want. I CHOOSE google because they are the best [i think] at what they do. I wouldn't chose AT&T or TWC (woot! 6megs downstream for $50/month!] if I had a choice. I seem to recall my local power company asking the state senate for money to research pwoerline tech. Any guess which 2 companies sent lawyers to my little State senate? Hint: Neither of them was Google. I remember my old college being sued for trying to roll out it's own campus wi-fi in conjunction with another major telecom... apparently Sprint can't get no long round these parts either.

I am constantly impressed with the breadth, depth and level of insight this site brings to me on a daily basis. I can't remember a time when an Ars Technica article has failed to give me insight into some technical matter in clear concise language and seamlessly weave it's affect into the world that I live in.

Where I most disagree with your article is that broadband companies are monopolies when they clearly are not as the FCC/DOJ/FTC competition reviews have consistently found. The U.S. has more facilities-based broadband competition than any nation in the world. See: www.netcompetition.org.

Given that most "broadband companies" are also infrastructure providers for a given area, I have difficulty believing that they do not constitute de-facto monopolies. Further, if you're going to make a point like this, you should substantiate it, rather than simply providing a link to one of your pages.

Shoot, even today all you have to do is wave a flag, sing Yankee Doodle and call the opposition socialists and mindless minions misplace their brains and fall into line and act like the good chattel that they are.

Network neutrality harms the blue-nosed plutocrats and the sycophantic followers of their economic theories. Nothing changes except the players.

As someone who got out of the newspaper industry, I can see how this rotting from the inside over the decades lead to the mess they're in now. I even worked for the opposition - UPI - which because of AP's monopolistic ways we started calling "Unpaid Photographers International." Though in actuality, I was always paid. I covered the Missouri Legislature (Remember Gov. John Ashcroft?) and University of Missouri sports for them. And it was sad to watch the monopolistic pressures from the AP which eventually drove them into the arms of Pat Robertson - and thus into oblivion.

And yet all you have to do is throw out a few a priori attacks on someone trying to remedy the situation, call them commies, and they become untouchables with way too many people. I have little hope that things will get better. The only REAL way to bring prices into line and give us openness is to regulate sensibly. The wild and wooly West is not the way to freedom. Ask the Indians.

Originally posted by WaltC:Interesting perspective, especially when I note that two out of three AP stories I read today seem very biased politically. I guess qualities like bias and greed are just human nature, aren't they? I would never argue with the proposition that corporations can be guilty of being human (because they are run entirely by human beings), provided I don't have to stipulate that the government is somehow above it all. Seems to me the government is run entirely by human beings, too. Some people seem to think, though, that the government is run by those Not of This Earth.

You're absolutely right. But what people hope is that the motivations of those organizations stay true: Companies want to profit, Government wants to safeguard ALL public resources and freedoms, and voters will reward/punish government appropriately. But all three angles are horribly broken right now.

Originally posted by Scott Cleland:Where I most disagree with your article is that broadband companies are monopolies when they clearly are not as the FCC/DOJ/FTC competition reviews have consistently found. The U.S. has more facilities-based broadband competition than any nation in the world.

I would agree that there are not complete National monopolies, but there are certainly local and regional ones, and that these telecoms/broadband providers certainly behave in an extremely anti-competitive manner by litigating anyone would even attempts to roll out alternatives to their services and by seeking government sanctioned hold over the infrastructure. That is not the behavior of 'free market believers'.

Also, America is a very large nation by landmass in comparison to many of the world's nations. So it's no surprise we have more providers on average, since we surely we would have more than say, Monaco or Liberia. The number of providers is meaningless if none of them are competing with each other.

Our Internet connections are indeed important as a source of data, entertainment, and information to our homes, and I believe it is critical that they be used to serve the individual citizens who pay to use those connections and not the companies or governments who deliver them.[EDIT: Spelling]

I've got to agree with the praise. This article paints the current net-neutrality argument in an interesting historical perspective. "The more things change, the more they stay the same.", right?

I'm not fool enough to think the government is populated only by white knights who live only to do what is right for Joe Public. But, as another poster pointed out, they are inevitably beholden to the voters.

Too many seem to think that it has to be one side or the other. Truth is, things work best when we find the correct balance of market freedoms with government oversight. History has shown that too much of one or the other only hurts us.

Well said. There used to be quite a few options out there for your broadband. Now it's been narrowed down to 2, which I would call a monopoly. Even though it does not fit the complete definition, it also makes it so there can be no competition against the two major companies. You either contract through them or you get nothing.

Originally posted by Scott Cleland:Where I most disagree with your article is that broadband companies are monopolies when they clearly are not as the FCC/DOJ/FTC competition reviews have consistently found. The U.S. has more facilities-based broadband competition than any nation in the world. See: www.netcompetition.org. The supreme irony of the net neutrality debate is that the lead corporate funder and force behind the net neutrality movement is Google, which also happens to be the real leading monopoly threat today. Please go to WWW.googleopoly.net and read my Googleopoly I, II, III, and IV analyses to learn the facts and logic behind why Google is the single biggest threat to competition in the Internet/broadband sectors today.Thanks for the opportunity to put your article into fuller context. Respectfully, Scott Cleland

Sorry Scott, but this is utter nonsense. I am stuck with Time-Warner cable. I don't have a choice. I'm moving to a new town soon, and I'm stuck with Cox there. If I want fast Internet, I have to use them. Direct TV doesn't give me a fast Internet connection. AT&T DSL is a joke. I have no choice right now but to use Time-Warner. The company that drug their feet on allowing me to have cable cards, and then left them in such a buggy state they didn't work correctly for over 18 months past the deadline the FCC gave them for implementing their system.

Tell me where I can go to get cable TV and fast Internet here in Carlsbad. I can't. That is a government-granted monopoly by a city council that has always shown bad judgement when it comes to these kinds of decisions.

I agree that Google is a threat and needs to be reigned in. But so do the cable companies that are monopolies in fact, if not based on some flawed analysis tweaked to show them to not be such.

I agree that internet providers for the most part own their infrastructure. Just as it makes no sense to have two or three natural gas mains or electrical wires running down every street. It makes little sense in having multiple internet/TV/VOIP carriers install infrastructure in duplication of their competitors.

I read various numbers on the rollout costs for Verizon to pass every home/business on a given street. That number was anywhere from 600/900 per home. How is duplication of this infrastructure beneficial to the consumer?

If every home on the street then accessed that service the amortization costs would be more reasonable than they are. Verizon will be lucky if they get 50% of the properties they pass. That doubles the amortization cost per customer. When dealing with technology the recovery time must be relatively short due to the rapid changes in technology.

I think that the sensible thing would be for ONE large pipe, if you will, to be installed and ALL providers share. How the details of this endeavor are worked out is debatable, but it should be done to keep costs to the consumer down and provide fast and complete service to all.

This obviously would be some type of monopoly. Here in Michigan we have a Public Service Commission that has worked relatively well for many years.

There is only one natural gas main down my street but there are competitors that can sell me natural gas while using the existing delivery system. This is possible because the PSC regulates wholesale prices and profits. That is the cost of maintaining a monopoly. Seems to me this is no different than what the article addresses.

Originally posted by TechNinja:"Our founding fathers understood that it is government that takes away people's freedoms, not individuals or companies..." ~Scott Cleland

Bwhahahahah

I don't dispute that government infringes on freedoms, but any company given a chance for more profit would happily trample all over freedom.

No they wouldn't... not if they weren't given a pass by government. With greater competition and enforcement of property rights businesses are at the will of the consumer. Remove competition through government intervention (subsidies, regulation, licenses, etc.) and customers fall to the will of the businesses who, having more time and resources per entity, can then further lobby government to restrict competition and infringe freedoms more. In a free(r) market businesses gain profit (which through competition is reduced over time) by pleasing their customers... there is no legitimacy in any action they may take against the rights of consumers and therefore would loose business and perhaps brought to arbitration for doing so.

Originally posted by Scott Cleland:Where I most disagree with your article is that broadband companies are monopolies when they clearly are not as the FCC/DOJ/FTC competition reviews have consistently found.

Respectfully, Scott Cleland

If you actually had respect for the readers here, you would be familiar with the discussions of that topic that have taken place, and not try and foist your absurd comment quoted above as a fact.

Originally posted by TechNinja:"Our founding fathers understood that it is government that takes away people's freedoms, not individuals or companies..." ~Scott Cleland

Bwhahahahah

I don't dispute that government infringes on freedoms, but any company given a chance for more profit would happily trample all over freedom.

No they wouldn't... not if they weren't given a pass by government. With greater competition and enforcement of property rights businesses are at the will of the consumer. Remove competition through government intervention (subsidies, regulation, licenses, etc.) and customers fall to the will of the businesses who, having more time and resources per entity, can then further lobby government to restrict competition and infringe freedoms more. In a free(r) market businesses gain profit (which through competition is reduced over time) by pleasing their customers... there is no legitimacy in any action they may take against the rights of consumers and therefore would loose business and perhaps brought to arbitration for doing so.

Was Western Union ever a monopoly? The article quotes some people who described it as a monopoly, but it also refers to competitors.

If Western Union became a monopoly, why? What prevented competitors from entering the market? The article says the U.S. government subsidized particular telegraph companies, which would have hampered competition. Did the U.S. government or other governments do other things to pick winners?

Did Western Union become a monopoly on telegraph service when the market for telegraphy was in decline? Telephone companies were in business by the time the article says Western Union's stock price dropped.

If Western Union was not ever a telegraph monopoly, did consumers respond to their abuses by switching to competitors? Over time, consumers clearly did choose competitors offering substitute services, since most of us don't communicate through telegraphy today.

Originally posted by Scott Cleland:Where I most disagree with your article is that broadband companies are monopolies when they clearly are not as the FCC/DOJ/FTC competition reviews have consistently found.

Yeah, and I can put cat-ears on my dog and say that by my rules I have a cat. All kinds of things become possible when you play with what words actually mean.

I live in the metro area of America's fourth-largest city, and I have exactly one broadband option. That option is the only one available because of collusion, payoffs, backroom dealing, lobbying, and chicanery--things that should be illegal but are instead the accepted way of the broadband market. I only wish I lived in whatever magical dream-world you seem to live in, where some kind of theoretical "facilities-based broadband competition" actually translates into more options for consumers.

Fantastic article. As a strong conservative Republican, I am constantly disappointed how Republicans in Congress have completely missed the fact that net neutrality should be a conservative issue. Conservatives are always talking about how bad "big government" is, and I hate big government as much as any other conservative. But they forget that what makes big government evil is not the fact that it's big or the fact that it's government, but centralization of power.

Anytime you have that much power vested in a single entity, it is bound to be abused. That is why checks and balances are needed to prevent abuse. In a world where private companies now exercise more power over individual lives and liberties than most governments ever could have hoped to do in the past, restraint on corporate power is every bit as necessary as restraint on government power. And it just so happens that government is in the best position to serve as a check to corporate power in cases like net neutrality.

I've actually written a blog post on why conservatives should support net neutrality for precisely this reason, which you can read here.

Originally posted by TechNinja:"Our founding fathers understood that it is government that takes away people's freedoms, not individuals or companies..." ~Scott Cleland

Bwhahahahah

I don't dispute that government infringes on freedoms, but any company given a chance for more profit would happily trample all over freedom.

No they wouldn't... not if they weren't given a pass by government. With greater competition and enforcement of property rights businesses are at the will of the consumer. Remove competition through government intervention (subsidies, regulation, licenses, etc.) and customers fall to the will of the businesses who, having more time and resources per entity, can then further lobby government to restrict competition and infringe freedoms more. In a free(r) market businesses gain profit (which through competition is reduced over time) by pleasing their customers... there is no legitimacy in any action they may take against the rights of consumers and therefore would loose business and perhaps brought to arbitration for doing so.

Did we even read the same article? This is what I don't understand about the pro-market crowd. They seem to think that if the government stops doing any kind of regulation, everything is going to be perfect and competition will abound. The simple fact is that businesses HATE competition because it means their overall profits are lower. Businesses will do anything (legal or illegal, moral or immoral) to decrease competition, such as buying out the competition, engaging in completely false advertising campaigns, manipulating the markets with their power, making exclusive deals with distributors to further decrease costs, etc.

If the government doesn't do anything in these situations, it basically makes the "free" market into a wild west, not an environment where competition thrives.

Now, don't get me wrong. It is true that there is a lot of bad government regulation that does not foster competition, such as exclusive contracts. However, this doesn't mean we should have no regulation, merely better regulation that protects consumers' rights and keeps the playing field fair, which is exactly what net neutrality aims to do.

As corrupt and inefficient as the government seems to be, it is really our only recourse for protecting our freedoms and maintaining a free market place due to the fact that the government is ultimately accountable to the people. Businesses are only accountable to their upper management and stockholders, who care only about the bottom line (profits).

Originally posted by Scott Cleland:Where I most disagree with your article is that broadband companies are monopolies when they clearly are not as the FCC/DOJ/FTC competition reviews have consistently found.

Respectfully, Scott Cleland

If you actually had respect for the readers here, you would be familiar with the discussions of that topic that have taken place, and not try and foist your absurd comment quoted above as a fact.

Exactly. Ars has so much good information covering all of these bases.

Just because some choices exist that doesn't mean they are actually competing with each other in ways that are consumer friendly and innovative. These days, a market doesn't need to be defined as a traditional monopoly in order to inflict the exact same negative monopolistic results that traditional monopolies inflict upon us so Scott's argument means very little as he falls back on traditional definitions. What matters is the result which in this case is high prices for shit quality where people have little to no actual choices which truly differ from each other. The reason for that result is not enough market opportunities for new competition to arise and thrive.

We not only need net neutrality, but we also need search neutrality because Scott is correct that Google is a big potential threat. We also need to start sharing the lines because that will allow new competition to grow and compete fairly. Does anyone remember how back in the late 90s we had a lot more small ISPs competing properly? That went away for very bad reasons. Scott, I recommend you read up on that quite thoroughly.

"Our founding fathers understood that it is government that takes away people's freedoms, not individuals or companies,"

That's because, when the Constitution was written, there were no companies as we know them today (and certainly no individuals as powerful as today's companies). At that time, corporations were rare, because they were hard to create; you had to get a bill passed. They were also much less powerful, because they did not have full personhood. Our founding fathers would be appalled by today's corporate landscape.

The only REAL way to bring prices into line and give us openness is to regulate sensibly.

quote:

And it just so happens that government is in the best position to serve as a check to corporate power in cases like net neutrality.

And will government do that?

quote:

However government is ostensibly in the service of the common good and ultimately beholden to the voter.

quote:

Government wants to safeguard ALL public resources and freedoms, and voters will reward/punish government appropriately.

quote:

As corrupt and inefficient as the government seems to be, it is really our only recourse for protecting our freedoms and maintaining a free market place due to the fact that the government is ultimately accountable to the people.

Is that how governments operate in the real world? Or are they more responsive to the interests of the powerful?

I enjoyed reading the historical part of the article, but I have to say I don't see the similarity really.

1. The telegraph was a national issue, not a local/ragional2. It was also a TRUE monopoly where there was no alternative options, most places have at least 2 options if not more (heck I have four where I live in Oklahoma, Cox, SWBell DSL, AT&T FIOS, and Verizon is coming in now as well).

The issue I have with net neutrality is we're asking for the Feds to come in to fix something that should be fixed by at the highest your state gov't and preferably your city council. This just simply shouldn't be meddled with on a national level as there is too many chances for them to screw things up for the majority in the process. Where as if it is handled on a state by state basis then a better solution can more easily and more quickly be reached. We already went through something similar back in the 80's here with the cable company at the time and our city council fixed it fine, they yanked their franchise agreement from the cable company until they complied. Amazingly enough compliance took all of about a week after that happened.

it can be fixed and handled locally, unfortunatly too many of us (including probably many of the article authors and posters here) simply don't want to make the effort to get their city council to fix it and would rather it be handled by the feds.

Matthew Lasar / Matt writes for Ars Technica about media/technology history, intellectual property, the FCC, or the Internet in general. He teaches United States history and politics at the University of California at Santa Cruz.